The Fed will continue to tighten!

“The Fed’s decision was unanimous and Chairwoman Janet Yellen emphasized that the central bank would raise rates gradually.”

Great, the “when will the next rate rise be” game will continue to be played. As the charts show, tightening was already “baked in”, and will likely continue going forward. The markets weren´t at all surprised!

First, NGDP growth (Monthly NGDP from Macroeconomic Advisers)

Tightening continues_1

10-year inflation expectations

Tightening continues_2

The dollar against a broad basket of currencies

Tightening continues_3

Industrial production

Tightening continues_4

PS Likely outcome: Sooner, rather than later, the Fed will bring rates back down! At that point FOMCers will raise their hands and say “We give up!”

11 thoughts on “The Fed will continue to tighten!

  1. I agree at some point the FOMC will have to undo its rate increase. My fear is by the time they realize that a tightening of policy was a mistake, the natural rate of interest will have been pushed down to a point such that returning the fed funds rate to a 0 to .25% range will not stop the damage. Even if the Fed turns to negative IOR to try to compensate, I fear they’ll stay behind the curve of where they need to be to get the fed funds rate below the natural rate. I will grant that my fear comes from a distrust in the competence of the FOMC but the FOMC has not given me any reason to trust their competence.

    • Luigi, An addition to the Statement (between brackets), which could be seen as bullish for stocks.
      The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction, (and it anticipates doing so until normalization of the level of the federal funds rate is well under way.)This policy, by keeping the Committee’s holdings of longer-term securities at sizable levels, should help maintain accommodative financial conditions.

  2. All markets had more or less anticipated the move. The verbiage was much more important, and there was nothing newly bad in that. So a bit of a relief rally. The gradual tightening continues as it has for a year or more. And that is likely to boost the dollar, lower yields and weigh on stocks over time.

  3. When the economy will show clear signs of slowing down (even moreso), I highly doubt that the Fed will admit that monetary tightening had anything to do with it. Look at the central bankers that tightened in 2010-2011 all accross the world: they are still claiming that it was the right thing to do.

    They will blame some “structural factor”. Or perhaps, if the stock market crashes (or house prices decline), they will blame that. Others will blame the Fed for leaving the punchbowl out for too long and creating “imbalances” in the economy.

    But maybe, just maybe, a few more people will be convinced that MMs, Svensson and Krugman were right. The world could use a few more people like Kuroda and Kocherlakota.

  4. Pingback: TheMoneyIllusion » The PBoC and the Fed both lost credibility

  5. Pingback: The PBoC and the Fed both lost credibility – ValuBit

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